Buy-Here, Pay-Here Mid-Year Report

HOUSTON — I recently completed an informal survey of many buy-here, pay-here dealer clients throughout the nation to develop a perspective on first-half sales and collections. This article summarizes that survey and looks ahead to the remainder of 2007.

Most BHPH operators believe that customer liquidity and inventory supply are the two biggest factors that have impacted their results during the first six months of 2007. First, let us look at how these factors impacted BHPH sales and collections, and then explore the reasons why. 

Virtually all dealers surveyed reported that 2007 sales have been flat or down slightly from the prior year. Collections, on the other hand (until June), have remained consistently strong while sales have fluctuated significantly from month to month.

Now, let's explore how these economic conditions have impacted first-half results. 

First, gasoline prices and inflation have robbed consumers of their liquidity. Gasoline prices rose steadily during the first six months, until recently, when they mercifully declined modestly. Inflation, particularly for consumer staples like food, has also reduced consumer liquidity. Retailers have increased the prices of the items consumers need (like food items) to offset slow sales in luxury and discretionary items. 

The impact of $3 gasoline and the higher cost of consumer staples has been hardest felt by low-income customers who are the backbone of the BHPH industry. The impact has been felt in two ways: Customers had difficulty in aggregating enough cash for down-payments and also struggled to pay all their bills and still make car payments.

However, a closer examination indicates that BHPH customers are both determined and resilient.  Many have altered their driving patterns and reduced discretionary expenditures to offset the increased cost of gasoline and groceries. 

Unfortunately, these changes in consumption only work temporarily. The decline in collections during June may be an early indicator that these lower-income customers are now experiencing more difficulty in handling their financial obligations. Fortunately, for them and our national economy, the recent decline in gasoline prices, albeit modest, definitely will help. Hopefully future declines will continue, which will stimulate sales and collections during the second half of 2007.

On the inventory side, 2007 began with good inventory being expensive and hard to find. Dealers who had to purchase significant inventory from December 2006 through February 2007 can testify to that.

Fortunately, used-vehicle market prices are still driven by supply and demand, which has resulted in some acquisition cost relief during the second quarter of 2007. However, dealers wonder whether this cost decline is temporary and whether costs will start to rise as the summer ends and fall buying begins. 

Many operators indicated they believe that inventory acquisition is now a year-round job rather than a seasonal one. It is certain that dealers will need a broad selection of inventory if they hope to sustain or increase sales throughout the remainder of this year.

Although the economic landscape appears to be challenging (with several factors outside operator's control), there are some things good operators are doing. First, they are somehow finding the right vehicles for their inventory at competitive prices. This means, in many cases, locating and developing new inventory acquisitions points or "holes".

In addition, they are carefully managing reconditioning and operating costs in order to sustain cash flow and profitability. Varying cost levels of inventory are needed in order to match customer budgets. 

Collections provide the "gasoline," which drives the BHPH engine. Successful operators are monitoring collections more closely as they fight for every consumer dollar. Some are utilizing payment devices to aid in the collection process and to reduce costs. It seems apparent, in the current environment, that "the squeaky wheel will get the grease."

Although the survey results above may not be particularly surprising, it is imperative that BHPH operators make the right underwriting and collection decisions in the months ahead. The most successful operators are not relying on the possibility of further declines in gasoline and food prices. Instead, they are studying portfolio loss trends, making underwriting adjustments, tightening and improving collections and a carrying broader range of inventory in order to sell customers vehicles they can really afford. Good luck!

Kenneth Shilson, CPA, is a principal in Shilson, Goldberg, Cheung & Associates LLP, , and president of Subprime Analytics, , which performs electronic portfolio analysis. Shilson is also the founder of NABD, which will host an Underwriting & Collections Conference in Houston on Nov. 11 to 13. For registration to the conference or for more information, visit , or call 713-290-8171.

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